International economics

Table of Contents

1. Topic pack - International economics - introduction
2. Section 3.1 International trade (notes)
3. Section 3.1 International trade (questions)
4. Section 3.1 International trade - simulations and activities
5. Section 3.2 Exchange rates (notes)
6. Section 3.2 Exchange rates - questions
7. Section 3.2 Exchange rates - simulations and activities
8. Section 3.3 Balance of payments - notes
   1. BOPs - introduction
   2. Credits and debits
   3. Current account
   4. Capital account
   5. Financial account
   6. Relationship between accounts
   7. Balance of payments - calculation
   8. Current account & floating exchange rate
   9. Current account & fixed exchange rate
   10. Balance of payments problems
   11. Consequences of deficit / surplus
   12. Policies to correct a balance of payments disequilibrium
   13. Consequences of a financial account deficit / surplus
   14. Marshall-Lerner condition
9. Section 3.3 Balance of payments - questions
10. Section 3.4 Economic integration - notes
11. Section 3.4 Economic integration - questions
12. Section 3.5 Terms of trade - notes
13. Section 3.5 Terms of trade - questions
14. Print View

Consequences of a financial account deficit / surplus

A surplus on the financial account means that there are more investment funds flowing into the country than flowing out. These inflows may be to fund a deficit on the current account of the balance of payments. Inward investment may help create jobs and boost growth, but anyone investing in an economy expects a return. Therefore, a surplus on the financial account will lead to outflows of interest and dividends in the future, thus affecting the balance on current account.

Any inflow of funds may exert an upward pressure on the exchange rate, as the demand for the domestic currency will increase. This may adversely affect the current account if the increase in export prices makes exports less competitive.

A financial account deficit, on the other hand, will mean a net outflow of investment funds. As a result, the country is building up a portfolio of overseas investments, which may lead to future returns of interest, profit and dividends. This may be beneficial in the medium-term. However, short term speculative outflows of funds may have disastrous effects on an economy in terms of the depreciation of the exchange rate, loss of confidence, impact on investment, output and jobs. Some countries have been badly affected by these speculative outflows of funds.